There is a feeling that by System Trading you can somehow miraculously dramatically cut down the time to become a Profitable Trader. Nothing can be further from the truth. forbes.com/sites/brettste…
And I feel that many new System Traders are too quick to pronounce it as the best way to Trade. Let them take one of the inevitable big drawdowns that this type of Trading results in and then we'll talk.
Lot of feedback on this tweet. I am not against System Trading. In fact I have been trying to find one to deploy some part of my Capital unsuccessfully for the last 2 years. Let me attempt to explain the difficulty in another way
On the face of it, Trading is very simple. Chose an inflection point on an underlying where you feel there is a good chance of a big move. Thousands of such setups are available from the most successful Traders for free on the web. Place a small stop loss and take the Trade
If you are right even 40% of the time, you will make pots and pots of money and if you adhere to the small stop loss, at the very least, you will lose a very small portion of your Capital. That's all there is to it. Piece of cake- right?
Doesn't quite work out that way does it? Under live Market conditions with real money on the line, over 95% of Traders are unable to follow these simple rules- particularly the one on the SL and they go bankrupt in short order.
The siren song of System Trading is equally beguiling. Get on a computer, tweak few indicators over few years of past data, come up with system which makes a good Return on this data, apply it to live Markets with real Money and voila- you have a steady guaranteed income for life
The problem here is the drawdown. The backtesting may reveal that a 40% drawdown is possible but ultimately things will work out and you tell yourself you are fine with it- much in the same way that you promise yourself that you will always strictly adhere to stop losses
Then your System runs into a series of losses and say a 10% drawdown. Suddenly your mind starts playing tricks on you. Earlier a 40% DD looked good in theory but with a 10% DD on real Money your perspective changes. You begin to play around with the system.
To stem the string of losses, you begin to play around with the system. You switch it on and off based on your Market biases. You fool around with the system parameters on the fly. You violate the rules. And 95% or more of the times you abandon it after taking serious losses
If you think that this weakness only happens with inexperienced Traders, read Jim Simons book and see how many times the world's most successful System Trader doubted the systems that were making a ton of money and actually switched them off because of his view at that time
And there is no guaranteed success. Richard Dennis of the Turtle Trader fame had to shut down his fund after it suffered unacceptable drawdowns and only a very small fraction of those he Trained had successful careers.
So to cut a long story short, Trading is not simple and System Trading is certainly no more simple than any other form of Trading. Yes it is a path which many great Traders have ridden to the top but it is also the abyss into which many have disappeared forever.
